Pharos Research has upgraded its fair value (FV) of Abu Dhabi Islamic Bank-Egypt (ADIB) to EGP 24, with an "overweight" recommendation, according to a recent report. The FV upgrade came on the back of several positive developments, including "a forecasted strengthening momentum in lending activity with a compound annual growth rate (CAGR) of 16% over 2017-2021, a revival in non-interest income to compensate for the compression in margins," the research firm said. Other factors behind the upgrade included "a reduction in effective tax rate from the current 52% to 30% starting the first quarter of 2018 and a surge in bottom line figures with a CAGR of 29% over the forecast horizon." ADIB Egypt is likely to get rid of its deferred tax asset resulted from tax loss maintained, the report added. It noted that the bank has been lowering its tax asset gradually since it was incapable of benefiting from this asset the short term. The report added that the bank should fully write off EGP 355m by the end of 2017 "after writing off EGP 281m and EGP 215m in 2015 and 2016 respectively." ADIB UAE, the mother company, is currently not interested in raising its stake in ADIB Egypt from its current 50%, the bank's manager said recently. "Any potential rights issue will be concluded if, and only if, share price is well above the EGP 10 par per share, in order to lure minority investors into the subscription, and maintain ownership. Consequently, dilution risk is minimal," Pharos added. ADIB is currently trading at cheap multiples of "price-to-book ratio (P/B) 18 and price/earnings ratio (P/E) 18 of 0.7x and 2.5x," compared to competitors, which is below the market average of "P/B 18 and P/E 18 of 2.1x and 9.0x." The report also highlighted the key upside triggers as the "faster-than-forecasted recovery in capital expenditure (CAPEX) lending and foreign direct investments (FDIs), the faster-than-expected pickup in non-interest income, and the higher than projected exposure to retail and small and medium-sized enterprises (SMEs) lending, which boost margins." The main downside risks, however, may occur through "converting the parent's funds paid under capital increase into equity, lower than forecasted asset quality, and 5% annual deduction from bottom line as proposed by the Central Bank of Egypt's (CBE) banking act." Meanwhile, Capital Intelligence Ratings (CI) has affirmed the National Bank of Egypt's (NBE) long- and short-term foreign currency ratings (FCRs) at ‘B', with a ‘stable' outlook, according to a report issued last week. The ratings agency also indicated that the bank's ratings are constrained by those of Egypt, at B with a stable outlook. CI also added that the bank's capacity for timely fulfillment of financial obligations is vulnerable to adverse changes in internal or external circumstances. In a separate research note, Pharos Research upgraded its "sum-of-the-parts" fair value (FV) of Orascom Development Egypt to EGP 27.82 per share from EGP 17.05, with an "overweight" recommendation. This "overweight" recommendation is a result of an FV comprised of residual land, receivables, and hotels at EGP 34.90 per share, EGP 6.47 per share, and EGP 2.87 per share respectively, as well as a net debt deduction of EGP 16.42 per share. Pharos attributed this FV upgrade to "including the residual land in Taba Heights, increasing occupancy rate assumptions for hotels in El-Gouna, using an EGP/USD exchange rate of 16.00 to value the residual land, and updating the net debt position."
